Last Friday, February 17, 2012, the House and Senate finalized and passed H.R. 3630, the Middle Class Tax Relief and Job Creation Act (the Act), which President Obama signed this week without fanfare. The law extends certain benefits for employees, the unemployed and doctors, and proposes to pay for these continued benefits, in part, by granting the Federal Communications Commission (FCC or Commission) new authority to auction spectrum licenses. Specifically, the Act orders the FCC to conduct a number of auctions of licenses for the use of various blocks of spectrum, including the 470-512 MHz band (T-Band Spectrum) and a number of blocks of federally owned spectrum, including 15 MHz of contiguous federal spectrum at a location to be determined between 1675 and 1710 MHz.

Most notably, the FCC also has been granted new authority to identify and auction off portions of the broadcast television bands. Subtitle D of Title VI of the Act allows the FCC to hold a reverse auction — an auction in which competing sellers offer successively lower prices and the buyer generally accepts the lowest bid — in order to determine the amount of money individual broadcasters would be willing to accept in order to voluntarily relinquish some or all of their spectrum rights. It also grants the FCC limited authority to involuntarily repack license assignments in order to ensure that the block of broadcast television spectrum that it ultimately identifies for auction is contiguous and attractive to potential bidders. Finally, the Act requires the agency to auction off any newly available spectrum within the next 10 years.

The auctions are expected to free up sizable portions of spectrum for wireless broadband use in an effort to alleviate a looming spectrum capacity shortage as Americans put increasing demands on U.S. wireless networks. Congress estimates that the auctions could raise $28 billion, and it hopes to allocate $1.75 billion of the proceeds to reimburse broadcasters and others for the costs associated with a repacking of the television spectrum, $7 billion to development of a public safety wireless network and up to $20.4 billion to deficit reduction. These sums are aspirational and may not be fully funded, in that they are dependent on sufficient funds being raised through the auctions. Because the Act is designed in part to raise money for these deficit reduction and public safety goals, the amount of revenue that ultimately will be available to compensate broadcasters for voluntarily relinquishing spectrum is unknown. According to published reports, analysts have speculated that the majority of broadcasters, particularly major network affiliates, are unlikely to participate in voluntarily relinquishing spectrum. That could increase pressure on the FCC to utilize its authority to forcibly repack the television broadcast bands in order to free up enough spectrum for wireless use — a priority of the current FCC chairman.

New FCC Authority to Hold Incentive Auctions

The Act grants the FCC authority to conduct incentive auctions which encourage licensees to relinquish their spectrum usage rights in exchange for a portion of the proceeds.1 The Commission is not permitted to enter into an agreement with a licensee unless it first conducts a reverse auction to determine what licensees would be willing to accept, and “at least two competing licensees” must take part in the auction.2 Then, if there are sufficient bids at a formal auction, the FCC would be permitted to pay participating broadcasters a to-be-determined dollar amount.

Implications: The new incentive auction authority granted to the FCC is broad, giving the agency latitude to determine auction procedures and to choose criteria for “acceptable” bids. As a result, the devil will be in the details when determining which parties will participate in the current broadcast spectrum reverse auction and in any future incentive auction the FCC may hold.

As one example, because the new incentive grants are restricted to auctions in which more than one “competing” licensee takes part, it appears that if only a single broadcast station were to volunteer to relinquish rights, there would be no payout. Because the language does not specify that a reverse auction must be held on a per-market basis, however, we believe that it may be possible for the Commission to hold a nationwide reverse auction in which at least two competing licensees from at least one market participate, and in so doing acquire actionable bids even from solitary representatives within other given markets. As a second example, the Commission appears to have discretion to set upper limits on acceptable bids in a reverse auction. Given the Act’s competing fundraising and spectrum allocation priorities, the ultimate incentive auction procedures are likely to be determined based on the Commission’s preferred balance between encouraging voluntary participation and ensuring that certain revenue targets are met.

Reverse Auction Procedures

The specific reverse auction of broadcast licenses the Commission is empowered to conduct by the new law allows broadcasters to specify what bids they would accept for: (a) relinquishing all of their current usage rights, (b) relinquishing their usage rights to a UHF channel in exchange for receiving rights to a VHF channel and (c) relinquishing usage rights in order to share a channel with another licensee.3 Those who agree to share a channel will retain such carriage rights with respect to cable and satellite distribution as they would have possessed before making such an agreement.4 The share of the proceeds of the forward auction granted to any broadcaster that volunteered to relinquish its rights under the reverse auction must match or exceed the bid submitted by that licensee in the reverse auction.5

Implications: Since 2010, the FCC has been promoting channel-sharing — packing two or more broadcasters into one 6 MHz channel — as a way to free up additional wireless spectrum.6 The new reverse auction procedures for the first time give the idea of parallel digital broadcasting by multiple broadcast entities within a single channel a legislative imprimatur. Broadcasters considering the channel-sharing option will have to weigh the audience cost in being more difficult to find over the air (though not via cable and satellite) against the financial windfall of a successful reverse auction bid.

Reallocation of Spectrum

The Commission also has new authority to evaluate broadcast television spectrum (taking into account any spectrum voluntarily relinquished) in order to to force broadcasters to accept channel reassignments, and to thereby free up spectrum from the television bands for reallocation through the forward auction discussed in the following section.7 In making any reassignments, the Commission is obligated to use “all reasonable efforts” to maintain the coverage area and population served by relocated television stations and not to forcibly relocate licensees of certain higher bandwidths to lower bandwidths (as digital television signal quality can degrade at lower bandwidths).8

The Commission must reimburse costs for broadcasters that relocate, multichannel video programming distributors that need assistance retransmitting those broadcasters and the non-broadcast incumbent users of Channel 37 who move their equipment to operate on another channel.9

Implications: Because the FCC forcibly can repack the broadcast band, broadcasters will need to weigh the risks and rewards of participation in the reverse auction with this potential downside in mind. Although the FCC must use “reasonable efforts” to maintain a television station’s coverage area and population served, there may be circumstances in which a station is repacked without being able to replicate its service.

Forward Auction Procedures

Once the Commission has identified areas of the broadcast television bands that are to be made available, the Act requires it to hold a forward auction to allocate that spectrum to the highest bidder.10 The Commission may, if it chooses, auction licenses that cover geographic areas of multiple sizes.11

The forward and reverse auctions may take place at the same time or separately, but the Commission onle may hold one of each.12 The Commission cannot reject participation in this forward auction or future auctions by any party who complies with procedures and otherwise meets the qualifications to hold a license.13

Implications: Published reports indicate that AT&T and Verizon Wireless sought inclusion of the participation clause as a limit on the FCC’s authority in order to ensure that they would be able to participate in any future auctions even though they already have significant spectrum holdings.14 Notwithstanding this limitation in the Act, the FCC still retains broad authority to structure its auction rules and could attempt to facilitate participation by a wide variety of bidders of all sizes (e.g., by offering bidding credits to smaller enterprises and/or by auctioning some spectrum to limited geographic areas rather than on a nationwide basis).

Allocation of Revenues

Revenues from the forward auction of broadcast spectrum will be allocated according to the source of the spectrum. For spectrum voluntarily relinquished by a broadcaster, revenue will go first to pay the bid of the licensee that relinquished its rights; second, to a newly established TV Broadcaster Relocation Fund designed to compensate broadcasters for the costs of repacking; and third, to a new Public Safety Trust Fund.15 Revenues from spectrum made available through involuntary FCC reassignment, however, will go first to the TV Broadcaster Relocation Fund and then to the Public Safety Trust Fund.16

Implications: Television stations whose bids are accepted in the reverse auction get their money first — before the Broadcaster Relocation Fund and before any payouts to public safety or deficit reduction. Though this might be expected to provide some incentive to broadcasters to sign on to the reverse auction process before any involuntary relocation, the FCC’s exercise of its discretion to set the terms of the reverse auction will determine the level of participation. The National Association of Broadcasters has already suggested that it would be “shocked if there’s some kind of stampede of broadcasters lining up to turn in their TV licenses.”17

15 Middle Class Tax Relief and Job Creation Act of 2012, § 6402. The Public Safety Trust Fund money will go largely to developing a new public responder wireless safety network, and then to general deficit reduction. Id. at § 6413(b).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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